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Growth & Income

Todd Bunton

Ituran Location & Control Ltd.

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By the end of 2011, all new vehicles in Brazil will be required to have a GPS-based tracking system installed. This may not be good news for car thieves in São Paulo, but Ituran Location & Control Ltd. sees huge market potential.

The company provides location-based services, primarily consisting of stolen vehicle recovery and tracking services, in addition to wireless communications products. The company operates in Israel (51% of revenue), Brazil (37%), Argentina (9%), and the United States (3%).

Brazil is adding 2.5 million new cars per year, and its theft rate is triple that of the U.S. One consultant expects the tracking systems market there to nearly double by 2014.

Third Quarter Results

Ituran recently reported its results for the third quarter of 2009. Total revenue was up 16% year-over-year. Approximately three-fourths of revenue came from location-based subscription fees, with the remaining coming from wireless communication product revenues.

Revenue from subscription fees grew by 15% over the same quarter in 2009 as the subscriber based increased 8.2% to 594,000. Product revenues were up 20%.

The gross margin improved slightly, from 48.7% of revenue to 49.0%, leading to a 17.6% increase in operating income.

Earnings per share came in at 27 cents, beating the Zacks Consensus Estimate by 2 cents. It was a 23% increase over the same quarter in 2009.

Outlook

Estimates for both 2010 and 2011 moved higher following the strong third quarter, leading to an upgrade to a Zacks #2 Rank (Buy) stock.

The Zacks Consensus Estimate for 2010 is $0.99, representing 13% EPS growth over 2009. The 2011 estimate is currently $1.12, equating to 13% growth over 2010 EPS.

Income

The company has paid an annual dividend each year since 2006, including two large payouts in 2008 and 2010.

ITRN: Ituran Location & Control Ltd.

In 2010, Ituran paid a dividend of $1.50 per share, which equates to a current dividend yield of 9.1%. This dividend, like the one in 2008, was more like a special dividend due to excess cash on the books. Its payout ratio of 150% is obviously unsustainable, so it's unlikely that this large of a dividend will be paid out with any regularity.

Nonetheless, the company has high operating margins and produces stable and growing free cash flow, so nice-sized dividends are certainly possible for the foreseeable future (just don't expect $1.50 per share).

Valuation

Shares trade at 16.8x forward estimates, in-line with the industry average. Its price to book ratio of 3.2 is currently higher than the peer group at 1.7.

Return on equity is a stellar 16.6%, however, well above the industry average of 9.1%. This helps to justify the higher price to book multiple.

Ituran Location & Control Ltd. was founded in 1994 and is headquartered in Azour, Israel. It has a market cap of $388 million.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

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